Executive summary
This paper aims to provide a critical assessment of the term “strategic alliances” in the context of the global smartphone industry given the case study: “Nokia-Microsoft alliance: Joining forces in the smartphone wars” (De Wit & Meyer, 2011). Firstly, the nature of the fierce competition in the smartphone industry will be demonstrated, with particularly the war between the used-to-be dominance in the smartphone industry Nokia, and other strong rivals such as Apple and Google. Data, numbers and figures are shown to illustrate how Nokia had been miserably struggling to compete against such strong rivals and to stop their profits and market share from tremendously declining. Secondly, the theoretically review of the term “strategic alliances” and “mergers and acquisitions” will be presented. This paper will then in-deep analyze the impacts of strategic alliance on Nokia before and after being acquired by Microsoft, in term of market share, profits, share price, etc. Finally, the organizational culture, structure, innovation and leadership of Nokia influenced by the strategic alliance with Microsoft will be further discussed to evaluate the ability of Nokia’s CEO and senior management team to make current and future strategic alliances work more successfully.
Question One: Smartphone Industry Competitiveness
1 (a) Critical evaluation of the nature of the industry competition facing Nokia from new mobile operating systems entering the market e.g. iOS and Android
The mobile phone industry had never been at such an extreme level of dynamically active until the first decade of the 21st century, when the concept of smartphone with converged-function was fully shaped and widespread as it consequently rocketed the demand for a smartphone product with various synchronized technologies to perform as a multi-function device. Nokia had dominated the smartphone market since 1997 with the release of its Symbian OS that allowed it to enter the high-end smartphone market. Nokia generated $9.7 billion in revenue (1997) and rapidly increase to $54.27 billion in 2006 (Nokia, 2006). However, new mobile OS entering the market such as iOS and Android has created a revolution in the industry that bring out challenges for Nokia. The nature of the industry competition facing Nokia can be evaluated refer to the 5-forces model proposed by Michael Porter (1980).
Figure 1 Five Forces Model (Porter, 1980)
The threat of new entrants is strong in the smartphone industry. The smartphone industry is a potential and an open market with 67% market growth rate (Canalys, 2010). The global revenue reached $56.92 billion in 2009 and was expected to swiftly increase to more than $272 billion in 2015 (Statista, 2014). Apparently, these typical results represent a wealthy and strong developing market that attract many firms. For example, Samsung with Bada OS, BlackBerry with BlackBerry OS. Especially, the entrants of Apple iOS and Google Android has put a fierce challenge for Nokia in the industry.
The bargaining power of buyers is high because with a wide variety of smartphone choices, customers have major brand choices and are willing to pay higher price for the latest product. However, since the release of the revolutionary iOS by Apple in 2007, customer’s preferences tend to be drawn toward Apple’s products with interesting design, user-friendly platform, huge app resources. This has caused a major decrease in the selling power of Nokia, with a decrease from 100.3 million smart phone sales in 2010 to only 63 million unit sold as of Q3 2013 (The Statistics Portal, 2014). In fact, Nokia is facing a significant difficulty of losing customers over rivals such as Apple and Samsung.
The bargaining power of suppliers is medium because although smartphone manufacturers rely on their suppliers for quality component parts at a competitive price, there are in fact many component suppliers available that firms can easily switch to. This fact has reduced the bargaining power of suppliers. Besides, Nokia is a global corporation with 50.9% of global market share as of Q3 2007 (Statista, 2014), apparently grant them more bargaining power over suppliers.
The threat of substitutes is high for Nokia because it was unable to embrace the advantage of developing technologies, and at the same time, many new mobile OS entering the market providing a more innovative and creative device that are integrated with a more advanced technologies than Nokia, such as iOS or Android. This factor makes it further harder for Nokia as the substitutes are now capable of replacing them in the market.
Competitive rivalry is very high because the joining of many new mobile OS has made Nokia to compete against many larger firms, such as Google and Apple. Besides, the incapability of Nokia in utilizing advanced technologies has made them trailing their rivals. By the time many other mobile OS such as iOS or Android has already success in the market, Nokia had only just released their Lumia smartphone range that was not even innovatively advanced enough to compete against rivals. This has caused a gigantic decrease in the smart phone sales, from 77.68 in 2007 to only 63 million units in 2013, with an decrease of 29.8% of market share, from 43.7% to 13.9% in the period of 2007-2013 (Elmer-Dewitt, 2014). Consequently, Nokia is facing a very tough challenge since the joining of new mobile OS such as iOS and Android.
Generally speaking, the industry competition facing Nokia is very challenging because not only Nokia has failed in utilizing advanced technologies to embrace innovation competitiveness, but also at the same time the entrants of Apple or Google with such a revolutionary products like iPhone has caused Nokia its dominance in the smartphone market. Nokia even finds it difficult to compete against low-cost manufacturers like ZTE and Huawei in China and Europe, as they lost 18% sales in China, 27% in Europe and 61% in North America (Forbes, 2013). Apparently, the entering of new mobile OS has put a fierce challenge facing Nokia in the smartphone market.
1 (b) Discussion of the impact of the global smartphone industry competition on Nokia’s smartphone market share and income from 2006 to 2010 (data retrieved from Exhibits 3, 4, 5, 6, and 7 in the Nokia case (De Wit and Meyer, 2014)).
The release of the Symbian OS in 1997 together with new generation smartphones from Nokia has put the corporation in the leader position in the industry. The period 2006-2007 has seen the dominance of Nokia in the global smartphone industry, with the introduction of many product generations aimed for high-end market segment. The corporation net income is increased from €4306 million in 2006 to €7205 million in 2007 (Statista, 2013), with its share of global smartphone market reached 46.7% as of Q1 2007 (Statista, 2014). As of 2006, Nokia’s revenue was $54.27 billion, with 1.1 million smartphones shipped around the world (Canalys, 2007). Even though at that time, there were already many players in the field, such as Motorola, Sony Ericsson, however, all of them were incapable in competing with Nokia, with only 6.6% and 5.1% in global market share respectively (Canalys, 2007). In short, by the end of 2006, Nokia remained their dominance position in the global smartphone market.
However, the dominance position of Nokia started shaking since 2007 with the release of revolutionary Apple’s iOS and following by Google’s Android. The growth of Nokia reached its peak with €7205 million in 2007, and began to fall down significantly by half as it was €3988 million in 2008 (Statista, 2013). Apple has opened a new era for the smartphone industry, as many players were able of taking their chances to change and renovate themselves, such as Samsung and Lenovo. These firms eventually became strong rivals in the competition as they were able of beating Nokia with smartphone technology, diversity and design application created to attract consumer. As such rivals gained significant market share, such as Samsung increased from 3.3% to 9.4% from Q4 2009 to Q4 2010 (Canalys, 2010), Nokia started to lose market share fast. Its share of the smartphone market fell from 46.7% in 2007 to 32% in 2010 (Ricknas, 2010). Pressures were heavy for Nokia as the lost in market share has forced them to reduce the prices of their high-end smartphones, which in the end lowered their profits, and at the same time they were also losing in the low-end market as firms such as Lenovo, ZTE and Huawei began to knock them out in this segment. Nokia’s profit received a fatal strike as it went down from €4366 million in 2006 to €1343 million in 2010 (Nokia, 2010).
Figure 2 (Gatner, 2011)
Lost in both high-end and low-end market, together with slow reaction to market changes and lack of innovation, Nokia’s net profit has witnessed a miserable decline from 2007 as it reached the bottom in 2009 with only €260 million in 2009 (Nokia, 2009). Besides, the continuously introduction of rivals’ breakthrough products such as iPhone generations, Samsung Galaxy, etc. led to the abandonment of customers and investors toward Nokia, which consequently sharply decreased the corporation’s share price. Nokia’s share price fell 16.31%, from €27.70 in October 2007 to only €9.47 as of July 2009 (De Wit & Meyer, 2011). Apparently, the fierce competition in the smartphone industry, initiated by the introduction of Android and iOS has devastated Nokia’s finance, especially in term of income and global market share.
Question Two: Strategic alliances and global competitiveness
2 (a) Critical assessment of the terms “strategic alliances” (SAs) and “mergers and acquisitions” (M&As) in the context of Nokia’s ambition to sustain its competitive advantage in the global smartphone market.
The term Strategic alliances (SAs) refers to the co-operative agreements between potential or actual competitors, with the aim to utilize their internal skills and technologies to strengthen both companies (Hamel, et al., 1989). For example, General Motors and Toyota assemble automobiles, Canon supplies photocopiers to Kodak, etc.
The reason for SAs often base on the reflection of commitment and capacity of each partner to absorb the skills of the other. For Asian companies, SAs is mostly for learning and renovation. They learn the effectiveness and efficiency the way in which their partner operate, thus apply to their operation to improve their performance. Such commitments to learning represent a change in competitive tactics, for example, NEC in SAs with Honeywell has allowed them to facilitate its in-house R&D more efficient (Hamel, et al., 1989). For Western companies, however, SAs often aim to gain economies of scale while reducing cost and avoiding risks. Frankly, for companies to gain benefits from SAs, they need to aware that, first, collaboration is competition in a different form, as their partner may not be their friend forever. Secondly, in some cases, conflict in SAs may result in mutually beneficial collaboration. Thirdly, companies should be able to realize the threat of competitive compromise as limitation should be set out to protect their competitive advantages and core competencies in the SAs. Finally, it is important that partners in SAs learn from each other’s strength to improve themselves in a way of building skills in areas outside the formal agreement and systematically diffuse new knowledge throughout their organization (De Wit & Meyer, 2011).
Mergers and acquisitions (M&As) serves as one of SAs’ indicator, which account for $3.4 trillion in world economy in 1999 (Bennett, 1999). Mergers is the joining of at least two companies into a single legal entity with the approval by the shareholders of both firms. The assets of the smaller company are merged into the those of the larger one, with surviving company and shareholders of the target company are either bought out or become shareholders in the acquiring corporation (Havard Business School, 2000). Acquisitions occur when one firm purchase more than 50% of the voting shares of another. The two companies can then continue to operate as separate legal entities, with the acquired firm is referred as the subsidiary. Unlike mergers, in acquisitions, the buyers can negotiate which assets to buy and which liabilities to assumes. Regarding stock acquisitions, the buyers only deal with the target shareholders for the sale of their stock. M&As provide benefits of assets acquire cost reduction, greater economies of scale, high performance of production or distribution process, growth through internal expansion, product diversification, etc. Frankly, by using M&As, companies can acquire lower unit costs, stronger purchasing power or gaining of management efficiencies.
In an attempt to sustain its competitive advantage in the global smartphone market, in February 2011, the SA between Nokia and Microsoft was announced as Microsoft spent $7.2 billion in acquisition of Nokia. Nokia, being the pioneer in the smartphone industry, with strength in offering modernized smartphone solutions quickly, but their solution development was time-consuming and impractical that consequently made them trailing their competitors. Microsoft had no experience in manufacturing smartphone and was looking for a strong smartphone manufacturer to support their mobile-oriented initiatives by offering millions of Windows Phone devices to the market and to unfurl the Windows Phone application ecosystem for their long term benefit. Hence, the SAs between Nokia and Microsoft was naturally fit and was expected to turn the tide in a way of creating a third alternative mobile OS that capable of competing in the market, make it the “three-horses race” among their alliance, Apple and Google.
For Nokia, the deal seems to benefit their ambition. Nokia received $1billion from Microsoft to promote and develop Windows Phone handsets, and switch from Symbian OS to Window Phone OS. However, Nokia could continue to use many of its own applications and internet-based, such as its mapping software and other Internet services package, and not only in Window Phone, but in any OS of its choice in the future. Although many criticism stated that the SA with Google’s Android would have been a better choice, however, since Android had already become a default OS for many other mobile phone makers, and the fact that Google did not allow Nokia to modify Android or to utilize its applications under their brand, it would not be a wise choice. The SAs with Microsoft, in contrast, allow Nokia to differentiate itself from other mobile companies which used Windows Phone in their handsets.
In the SA with Microsoft, although lost 50% of revenue and 32000 employees to be transferred to work at Microsoft (Hartung, 2013), in a long-term view, Nokia would benefit from the savings in R&D expenditure and marketing support from Microsoft. It means cost reduction for Nokia, a company whose profit is low and unstably struggling. Besides, Nokia’s commitment to learning in the SA also represent changes in its competitive tactics. By utilizing the R&D support from Microsoft, Nokia was able to better modify its Symbian OS for some of its low-end entry smartphones, and at the same time, to develop MeeGo for its future requirements. The tactic was to made franchising of Symbian OS and was expected to generate good revenue for Nokia as it wanted to sell 150 million devices using the Symbian OS to those countries where it still had a good image and commanded a significant market share, such as India or some European countries.
In the other hand, Nokia could always flexibly switch to other OS, such as its own MeeGo in case Window Phones failed in the market.
The advanced software and technologies support from Microsoft also allowed Nokia to facilitate its development in the field of network equipment NSN, or Nokia Siemens Network, mainly served the Mobile Broadband and Global Services segment. The bottom line and operating margins was increased to approximately 10%, which is a significant shift from the previous sub-zero margins, with positive cash flows that brought in a positive signal for the corporation (Nokia, 2013).
2 (b) Discussion of Nokia’s alliance with Microsoft in February 2011, how it helped in stopping the decline in Nokia’s share of the global smartphone market as well as the “shake up” at Nokia.
The SA between Nokia and Microsoft in February 2011 has actually paid off for Nokia as it helped them to stop the seemingly unstoppable decline in their global smartphone market share. This due to 2 main reasons. First, the acquisition of Nokia by Microsoft has led to the restructure of Nokia, from the top manager to the product business units. In September 2010, Nokia replaced its CEO Olli-Pekka Kallasvuo with Stephen Elop, and swiftly thereafter he reviewed and restructured its Group Executive Board to establish the Nokia Leadership Team, aiming to expedite decision marking and improve time-to-market of products and innovations. Besides, ineffectively long product development cycle process due to many levels of unnecessary process and hesitative decision making was the main reason that Nokia was trailing its competitors because by the time its new product was launched, it was already outdated. Aware of this problem, Elop divided Nokia’s business units into 2 parts focusing on high-end smartphones and ordinary mobile phones, resulted in a more effective working environment with a clear goal to achieve, thus allowed Nokia to achieve higher work performance. Besides, financial and technological support from Microsoft, such as applications, engines, $250 million “platform support payment” per quarter, etc. also helped Nokia to launch products with innovative and unique features, for example, superb camera and imaging technologies, to attract customers, thus positively affect its profit margins.
Secondly, it was the regular training sessions and workshops frequently held by both Microsoft and Nokia around the world that represents the commitment to learning and exchange knowledge between and among the 2 corporations and application developers. Trainings and meetings were often organized for engineers and business units to learn and exchange knowledge, ideas, creativity, insights, visions, initiatives, customers feedback, etc. Not only this helped to increase mutual understanding, but also to improve the product functionally and competitively. Moreover, Microsoft and Nokia also worked together in organizing many workshops and competition to engage with application developers in the Window Phone OS. As a result, thousands of application developers worldwide were attracted as the applications available in Windows Phone Marketplace had surpassed 200,000 as of December 2013 (Nokia, 2013). Successful in drawing attention from application developers and thus customers worldwide resulted in the increase in the sales of Nokia, i.e., economies of scale.
Apparently, in term of market share improvement, the newly launched Nokia Window Phone was getting good responses from the market, as it was concluded to be the most rapid growing mobile platform in Q3 2013, with 10% exceeding in the European market (Nokia, 2013). As the end of 2012, Nokia ranked 3rd in the global smartphone market share with 35 million units sale (Moore & Ahonen, 2014).
The shake up at Nokia has brought many drastic changes to the corporation, however, it seems like these changes implied several practical challenges for the corporation. Although the SA between Nokia and Microsoft acted like a “life saver” for Nokia with financial and technical support from Microsoft to rescue its burning business, however, Nokia still had to the cut off of 10500 employees and closed its factory in Romania, which made many workers to fall in unemployment, just in an attempt to save costs under the direction of Microsoft. In the long-term, Nokia would have to cut about 7,000 employees around the world to save extra $ 1.5 billion budget for 2013. It is clear that the support from Microsoft is obviously not enough.
Another change is that although Elop’s restructure seems to direct Nokia through its disruptive times, this change practically soon after resulted in the abandonment of Nokia Symbian OS and the cease of development of the MeeGo and its successor “Meltemi” platform. Moreover, the deal that Nokia committed to pay software royalty payments to Microsoft and many other dedications such as hardware design, language support, market segment, regional reaches and operator relationship in the mainstream Windows Phone products, in fact didn’t pay off for Nokia. Consequently it resulted in the selling out of Symbian and Qt development and maintenance to Accenture and Digia (Digia Plc, 2012). The forcefully applied of different nature of Microsoft to Nokia also created negative impacts that frustrated the internal and external stakeholders, soon later stopped customers and developers from investing.